Cautiously optimistic
? We view OCBC’s target of >10% FY22-24F CAGR in income and profit as achievable, supported by strong wealth mgmt. income and rate hikes.
? We expect c.25bp credit cost in FY22F – on the higher end of its guidance as global supply chain issues persist. Overlays not likely to be reversed as yet.
? Reiterate Add. More clarity on capital mgmt. a re-rating catalyst. OCBC is attractive at 1.1x FY22F P/BV, below its 1.4x peak during last rate hike cycle.
OCBC targets >10% CAGR in income and profit over next 3 years
Management reiterates its cautiously optimistic outlook for FY22F, given the improving business sentiment from an economic rebound across ASEAN amid the headwinds of inflation, rising commodity prices and geopolitical tensions. OCBC targets mid-to-high single-digit loan growth for FY22F (FY21: c.8%) and >10% FY21-24F CAGR in income, profit and loan growth, driven by organic growth. It expects wealth management income (c.37% of its total income) to remain a key driver. Besides wealth management, earnings will likely be driven by NIM expansion. OCBC guides that it has a NIM sensitivity of c.4.5bp per 25bp US federal funds rate (FFR) hike, with its NIMs likely to trend 1.5-1.55% in FY22F. We factored in six FFR hikes over FY22-23F, and think NIMs may rise a cumulative c.22bp to c.1.76% over FY22-24F, with expansion likely to be backloaded given an estimated c.6 months for the pass-through from FFR hikes into NIMs.
Lower credit costs guided for FY22F; overlay writebacks unlikely
OCBC recorded heftier impairments of S$317m (or 44bp; CGS-CIMB’s calculation) in 4Q21, bringing full-year credit costs to 32bp – higher than our expected 25bp. Most of these impairments were attributable to syndicated project financing deals in Greater China which were affected by manpower and equipment delays. The bank’s NPL ratio held steady at 1.5% in 4Q21 as higher NPAs from Malaysia (extended moratorium and PEMULIH loans were classified as NPA) and Indonesia (broad-based) were offset by writeoffs of oil-and gas support vessel exposures in Singapore. All in, relief loans shrunk to c.1% of total loans
in 4Q21 (3Q21: 2%) and the NPA build-up was not concentrated in any one sector. OCBC guides for credit costs of c.20-25bp in FY22F – we keep our conservative 25bp estimate for FY22F. Although OCBC has c.S$400m of management overlays (or excess impairments) in 4Q21, it views its current ECL model assumptions to be insufficient in providing for potential recessionary scenarios. Accounting for this, its excess impairments would amount to less than S$100m. Management guides that a writeback of these overlays are not likely at this juncture.
Reiterate Add with GGM-based TP of S$14.20
OCBC maintains a progressive and sustainable dividend policy with a targeted payout ratio of c.40-50%, although the decision on payout would largely be based on maintaining an absolute number rather than ratio (FY21: S$53Scts, 49% payout). CET1 stayed robust at 15.5% in 4Q21; there are no M&A discussions ongoing. We raise FY22F DPS estimates to 60Scts (50% payout) as we expect c.11% EPS growth and surplus capital.